Six alternative and balanced investing tips

As mentioned in our introduction, returns of up to 190% on last year's selection shows just how rewarding niche opportunity investment trusts and closed-end funds can be.

Private equity trusts have achieved good exits from their investments due to rising markets, but as a result have been left with relatively immature portfolios.

With some selections expected to be more defensive than others, very wealthy people tend to put a high priority on capital preservation, so family trusts such as Caledonia, that invests on behalf of the Cayzer family, are liable to be defensively managed.

Although defensive trusts are likely to be dull in a rising market, they should hold up well in a setback.

Also, UK-focused property funds are on dangerously high premiums. Even the high-quality F&C Commerical Property trust looks too expensive on a 16% premium, so we have looked to a different sort of investment company for our property exposure.

To find out Fiona Hamilton's top tips for growth and income investors in 2014, read: Five tips for growth and income investors.

Below, we reveal this year's top investment tips for alternative and balanced investors.

For alternatives...

Real Estate:

TR Property Trust

TR Property Trust invests mainly in the equities of property companies, on a pan-European basis. This gives it a much wider universe than the UK-focused property companies, and allows it to adjust its portfolio more easily than trusts focused on physical property.

Despite this, manager Marcus Phayre-Mudge says the returns on real estate securities have been increasingly correlated with those on physical property and decreasingly correlated with general equities.

UK quoted shares account for 41% of the portfolio, with 52% in continental shares, so there is some currency risk. The underlying "look-through" exposure is 36% UK, with most of the rest in France, Germany and Sweden.

Phayre-Mudge seeks to back the best prospects so has been overweight Central London offices and top-of-the-range retail parks in Europe. Up to 15% of the portfolio can be invested in physical property.

Exposure has recently been below 7%, all in or around London, but Phayre-Mudge and his team have been looking for additions. The trust has recovered well from a hard time in 2007/08. Its five-year net asset value (NAV) returns compare well with those of most UK direct property funds, yet its shares trade at a discount rather than a premium.

Its yield is only 3.1%, but annual dividends have more than tripled in the last 10 years, and revenue reserves are equal to half the annual payout.

Forestry:

Phaunos Timber

Phaunos Timber has been the mangy cur among our selections, but holders may yet be rewarded. The global timber market is recovering, especially in the US and China, and the managers have sold a number of non-strategic assets for decent prices in order to focus on their core assets.

Foreign exchange losses, due to the Brazilian, Norwegian and New Zealand currencies weakening against the dollar, were largely responsible for the fall in NAV in the first half of 2013, and have since been less damaging.

Edison Investment Research reckons that reduced operating expenses and improving market conditions could help the trust generate a 5% annual return from its remaining investments. Two new independent directors joined the board in 2013 and shareholders have been promised a continuation vote in 2016.

In the latest twist, FourWinds Capital Management has been replaced as managers. Hopefully this will be a change for the better, and with the shares on a 42.4% discount, there is scope for a rewarding turnaround.

Funds of hedge funds:

Bluecrest All Blues

Funds of hedge funds are horrendously difficult to understand, while performance in the past few years has been generally disappointing. However some respected institutional investors still favour an allocation to hedge funds, in the hope of relatively steady long-term returns.

Those who want to join them should consider BlueCrest AllBlue. It has had a disappointing year, having been badly caught out by the size and speed of the market setback in May/June.

But it is considered the pick of the sector by several leading analysts. It invests in six underlying hedge funds with complementary strategies and a low correlation to each other or broader asset classes.

All are managed by BlueCrest Capital Management, a leading hedge fund manager. The fund imposes no management or performance fees, so the only charges are those on the underlying funds, which is unusual.

In addition, the board uses new issuance and share buybacks to keep the discount relatively tight, and is committed to a continuation vote if the discount averages more than 5% over 12 months.

Infrastructure:

GCP Infrastructure Investments

Infrastructure funds are hugely popular because of their attractive, partially inflation-linked yields and their potential for medium term capital growth. The snag is that most now trade at premiums to NAV.

This could swiftly disappear if a rise in interest rates leads to an increase in the discount rate, which in turn reduces NAV per share.

In addition, stiff competition is making it much harder for the funds to secure good projects at an attractive price. We have chosen GCP Infrastructure Investments because it offers an above-average yield and values its investments using an unusually conservative discount rate. It differs from most infrastructure trusts in that it invests in subordinated debt rather than infrastructure concessions.

However its investment portfolio is still secured against long-dated public sector-backed cash flows and offers partial inflation protection.

Around two-fifths of its loans by value are exposed to private finance initiative (PFI) projects. The rest are exposed to renewable energy projects such as biomass and solar generation, where it has been able to invest on better terms.

For balanced...

Family trusts:

Caledonia Investments

Family-controlled trusts offer investors the chance to link their fortunes to those of wealthy individuals with long-term time horizons. Caledonia Investments was last year's selection, and its share price returns have been well above-average for its sector.

But with the widest discount in its sector, a decent yield, and the dividend on an upward trajectory, it remains our choice. Its lead manager is William Wyatt, a scion of the Cayzer family that owns around 47% of the shares, so he is very highly motivated.

Since taking charge in mid-2010, he has reshaped the portfolio to secure long-term growth and a rising dividend. Around a third of the trust's assets is represented by long-term stakes in around 20 high quality companies, such as Bristow Group, Close Brothers and AG Barr.

A similar amount is in approximately 10 privately controlled UK and European companies, where Caledonia seeks to create value by working closely with the managers. The balance is divided between funds which provide either listed or unlisted exposure to areas that Caledonia does not want to access directly, such as Asia and the US, and an income and growth portfolio of global mega cap shares with a 5% average yield.

The trust's board believes the price of unlisted investments is currently more attractive than that of quoted markets.

Private Equity trusts:

Direct exposure: JZ Capital Partners Ordinary Shares

For direct private equity exposure we are turning to JZ Capital Partners. It got into real difficulties in the financial crisis and was effectively relaunched in 2009.

However it has since made admirably steady progress. Its shares trade at an above average discount of 26.5% and offer a 4.2% yield.

It is managed from New York by Jay Jordan and David Zalaznick, both of whom have large shareholdings. It invests mainly in micro-cap companies, looking to buy into them on keen terms, then help them add value through operational synergies.

Two thirds of the portfolio is invested in the US, but around a fifth is now in Europe, notably in Spain, where it claims to have bought resilient businesses on very attractive terms.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.